Tuesday, March 14, 2017

La La Land Entrepreneurship: When Does the Specialist Entrepreneur Win?

In La La Land,
Sebastian is such a dedicated jazz pianist that he cannot bear playing other
kinds of music – and after many trials and travails, he succeeds as an
entrepreneur, starting the jazz club of his dreams. A wonderful story of
entrepreneurship (the movie had a love story too, I think), but is it
realistic? It depends on who you ask.

A recurring theme in
entrepreneurship is the trust in generalists – people who can master a wide
range of tasks. This trust comes from one big-picture and one small-picture consideration. The big-picture consideration is that
successful entrepreneurship has a component of inspiration gained from
combining ideas that others do not see as connected. You may be carrying the
descendant of such a combination: the iPhone was put together by a company
making compact MP3 players that had just exited an alliance with Motorola to
make cellular phones. The small-picture consideration is that smaller
entrepreneurs often end up being in charge of everything, first directly, then
through having to find and recruit expertise in each function. Generalists are good
at this.

But could Sebastian have
become a capable founder of a jazz club if his interests and skills were all
over the place? The argument against generalists is that they are superficial
and don’t know enough about any specific topic to do well. A paper in the Administrative Science Quarterly by Olenka Kacperczyk and Peter Younkin has waded into this
argument with important ideas and some evidence. Fittingly, the evidence is on
music industry entrepreneurship: artists forming independent record labels.

The key idea emerging
from their research is this: pure generalists have no particular advantage in
entrepreneurship; what is needed is one area of specialization combined with
general knowledge elsewhere. Specifically, specialization in the market pays
off when combined with general knowledge on the tasks needed for production.
This combination buys both credibility and the understanding of customers,
which are more important to specialize in than the mechanics of making a
product. The investigation showed big effects of market specialization, and
effects that were complementary to functional breadth. Market specialists could
double their odds of success by becoming more general in functional knowledge;
market generalists had low odds to begin with and did not improve much when
gaining more general functional knowledge.

So, Sebastian got
lucky. Yes, he had market knowledge, but he knew little about different
functions (I am not counting tap dancing as a useful function). A more typical case would be Justin
Timberlake, whose specialization in R&B and popular music was combined with
band membership, songwriting, performing as a backup singer, and music
production. So, today’s practical advice: if you want to form a music label,
follow Justin’s lead.